ANNUAL REPORT VTB BANK (EUROPE) SE 2019 CONTENTS FOREWORD BY THE MANAGEMENT BOARD 8 Opportunities as a result of improved infrastructure 22 NOTES 45 Other operating expenses and income 57 Opportunities arising from the expanded Extraordinary income and expenses 57 VTB BANK (EUROPE) SE AT A GLANCE 13 customer base and the product range 22 General information 45 Other information 57 Opportunities arising from shifting political and market conditions 22 Accounting and measurement policies 45 Annual result and recommended appropriation of profits 57 MANAGEMENT REPORT 15 Opportunities thanks to enhanced visibility 22 Cash reserve 45 Opportunities for the future 22 Receivables 45 OTHER INFORMATION 58 General information 15 Risk report 23 Securities 45 Business structure 15 Regulatory framework 23 Trading portfolio 45 Contingent liabilities and other obligations 58 Business model and management 15 General risk management approach 23 Participations and shares in affiliated companies 46 Consolidated financial statements and group information 58 Economic report 16 Risk culture 24 Property, plant and equipment and intangible assets 46 List of investments 59 World economy 16 Risk strategy and risk appetite 24 Other assets 46 Total auditor fee 59 USA 16 Governance and organisation of risk management 25 Accruals and deferrals 46 Number of employees 59 Eurozone 17 “3 Lines of Defence” Concept 25 Deferred taxes 46 Executive bodies 60 Germany 17 Internal committees and functions 25 Liabilities 46 Receipts of the executive bodies 61 United Kingdom 17 Risk Controlling 26 Provisions 46 Other financial obligations 61 China 17 Regulatory and economic capital adequacy 26 Fund for General Banking Risks 47 Events of special significance after the end of the financial year 61 Russia 17 Risk identification 27 Shareholders’ equity 47 Other information 62 Net assets 18 Risk measurement 27 Derivative financial instruments 47 Lending 18 Risk assessment and risk management 28 Currency conversion 47 INDEPENDENT AUDITOR‘S REPORT 63 Securities 18 Risk reporting 28 Trading portfolio assets 18 General economic risks and risk types 29 INFORMATION REGARDING THE BALANCE SHEET 49 REPORT OF THE SUPERVISORY BOARD 68 Deferred taxes 18 Macroeconomic risks 29 Other assets 18 Risk types 30 Breakdown of remaining terms 49 DISCLOSURE ACCORDING TO CRR 68 Liabilities to banks and customers 19 Default risks 30 Foreign currency volumes 50 Trading portfolio liabilities 19 Market price risks 31 Relations with affiliated companies and associates 50 COUNTRY BY COUNTRY REPORTING 69 Other payables 19 Liquidity risks 32 Trading portfolio 50 Provisions 19 Operational risks 33 Fixed assets 51 Equity 19 Summary presentation and outlook 34 Financial assets 51 Financial performance indicators as per “IFRS” 19 Forecast report 34 Securities, participations and affiliated companies 52 Valuation units 20 Forecast for Russia 35 Other assets and liabilities 52 Financial position 20 Forecast for the eurozone 35 Deferred taxes 53 Results of operations 20 Target figures of VTB Bank (Europe) SE 35 Provisions 53 Branch offices 21 Subordinated liabilities 54 General statement on the business situation INDIVIDUAL FINANCIAL STATEMENTS 39 Subscribed capital 54 facing the company 21 Capital reserve 54 Relationships with related parties 21 Balance sheet as at 31 December 2019 39 Revenue reserves 54 Report on opportunities, risks and outlook 22 Profit and loss account for the period Derivative financial instruments 55 Opportunities report 22 from 1 January to 31 December 2019 41 EXPLANATIONS REGARDING THE INCOME STATEMENT 57 Earnings broken down by geographic markets 57 Interest income 57 FOREWORD BY THE MANAGEMENT BOARD Arthur Iliyav Alexander Frey Ladies and Gentlemen, The global outbreak of the Covid-19 pandemic in the first quarter of 2020, Chairman of the Board Member of the Board however, has significantly worsened the global economic outlook for The 2019 financial year was a successful year for VTB Bank (Europe) 2020. In view of the continued unforeseeable negative consequences of SE. Following on from 2018 that was dominated by the operational the coronavirus pandemic, the outlook for the economy holds considerable implementation of the legal merger of VTB Bank’s continental institutions uncertainties. Despite the current volatile market conditions, to create a unified European banking institution in the form of a “Societas VTBE believes that, in light of the successful development of its structures Europaea”, the focus in 2019 was on further organic growth and the and of its range of products and services in recent years, it is well successful launch of a trading book. We have pushed ahead with numerous positioned to successfully overcome this crisis and to continue its growth activities, particularly in the IT, trading infrastructure and human resources strategy in Europe in the medium and long term. areas, thereby improving the conditions for further growth. SUCCESSFUL BUSINESS IN 2019 WITH POSITIVE TRADING RESULT VTBE has been operating as a trading book institution since March 2019. This enables us to meet customer demand for products traded both on Overall, we are very satisfied with our business trends in 2019. and off the stock exchange. In the course of the year under review, we We continued to focus on our business with institutional clients from the introduced products from the asset classes of bonds, foreign exchange, European Union, the Russian Federation and CIS states in trade, export and commodities and equities. Following the successful launch in 2019, for 2020 working capital financing. In addition, the successful launch of the trading Oleg Osipenko Oxana Kozliouk VTBE is planning additional expansion stages in the existing asset classes, book and a robo-advisor for VTBE’s investment clients in the area of asset Member of the Board Member of the Board in order to further extend the trading book product range and make it more management was also a success. In our newly established “Wealth and attractive for potential customers. To support the new trading activities, Investment Management” division, a total of nine different ETF products 63 new employees were hired in 2019, mainly in the IT and controlling are currently available to our clients. divisions. In the area of IT structures, the projects we have been working on include meeting customer needs even better with our services, such We achieved our ambitious business goals in our main target markets, as through the introduction of a new CRM system for our private clients, reporting a significant increase in net profit to EUR 117.6 million, compared featuring a service and a marketing cloud. With these new structures, with EUR 73.5 million in the previous year. Although interest-bearing VTBE is well positioned in the market for 2020 and beyond. business was down by 0.6 % year-on-year due to lower interest income in the securities business, we reported a positive trading result for the first TRADE CONFLICTS AND WEAK DEMAND DETERMINE 2019 time. This already confirms that we have successfully expanded VTBE’s business model with the launch of the trading book, and that this will The 2019 business year was influenced by a tangible economic slowdown, enable us to generate additional types of income. characterised by trade conflicts such as the ongoing trade dispute between the USA and China, and generally declining demand for industrial goods. Thanks to the higher net profit for the year, VTBE also improved its return Since the end of 2019, the first signs of an improvement have been on capital. We reduced the cost-to-income ratio to 35.8 % (2018: identifiable in this context, as the USA and China moved closer together 36.8 %), despite cost-intensive activities being conducted in the IT, with a new trade agreement, the United Kingdom agreed on the terms trading infrastructure and personnel areas. Overall, our growth in the 2019 of its Brexit with the EU, and important leading indicators for industrial financial year underlines that the merger of VTB's European units since the production have started to register an uptrend again. As VTBE focused to end of 2017 has proven its worth. As a bank, we are positioned increasingly a greater extent on Continental European clients over the past year, the efficiently and are able to expand our business despite challenging market trade dispute between the USA and China did not have any serious effects conditions. on our operating business. The VTBE Management Board will continue to monitor these trends closely in order to minimise their impact on the bank’s business. Moreover, the consequences of Brexit are unlikely to exert a major effect on VTBE, as the introduction of the trading book and the focus on Frankfurt as a financial centre have significantly strengthened VTBE’s position in Continental Europe. 7 8 2020 OUTLOOK BURDENED BY COVID-19 PANDEMIC The ongoing COVID-19 pandemic is a major uncertainty factor Especially in these times, VTBE is aware of its responsibility to its Frankfurt, April 2020 overshadowing 2020, which has a major impact on global economic employees and clients. For this reason, the Bank has taken the Our goal for 2020 is to continue on our growth path – also in a difficult developments. The financial sector will also be affected. Based necessary measures to ensure hygiene and distancing regulations at Your Management Board market environment. The focus remains on the completion of a number of on current knowledge, the Management Board assumes that its locations, and is enabling a large share of its staff to work from internal bank infrastructure projects, including in the IT area. In this way the VTBE business model will in all probability not be directly home in order to reduce the risk of infection. we aim to further improve the quality of service for our clients. Moreover, and extensively affected by the consequences of the COVID-19 we are making our internal processes even more efficient as part of pandemic.